This Week’s Fed Focus: All About Rate Forecasts

By Michael Aneiro

Another Federal Reserve policy committee meeting is upon us this week, and the intrigue this time regards where the Fed sees its short-term policy rate heading over time. The Fed isn’t expected to alter the pace at which it’s tapering its bond-purchase program, nor to tweak its unemployment rate or inflation rate targets. This Fed meeting is one of the quarterly meetings after which the Fed offers a window into the outlook of individual policy-committee members on the timing of rate hikes. The latest thinking is that the Fed sees rates staying lower for longer, as policymakers increasingly fear the rate of economic growth stays below its long-term average. Here’s Wall Street Journal Fed expert Jon Hilsenrath with a primer from his story in today’s paper:

Fed policy makers have traditionally believed their benchmark short-term interest rate, called the federal-funds rate, should be around 4% in a perfectly balanced economy, meaning one in which inflation is stable at 2% and unemployment is comfortably low around 5.5%. Officials are now debating whether interest rates will need to remain below that 4% threshold long after those markers are reached.

For now markets are still more focused on shorter-term forecasts, namely when the Fed thinks it will start raising rates, rather than where those rates end up years from now. Here’s Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, with his take:

The June FOMC meeting will include the release of summary economic projections (SEPs) and conclude with a press conference from Fed Chair Janet Yellen. The SEPs include each Fed official’s projections—conveniently anonymous—for economic growth, inflation, and short term interest rates in 2014, 2015, 2016, and “longer term.” Of these projections, expectations for short term interest rates are clearly the most important.

At the March FOMC meeting, these interest rate projections began going by the moniker of the “dot plot,” so called because they’re presented as a scatter plot of dots on a chart, with each… representing a single policymaker. In March, these dots drifted upward, signaling Fed members’ expectations of higher interest rates in 2016 in particular, and triggering a sizable selloff in intermediate term interest rates.

LeBas doesn’t expect a repeat of the March selloff, in part because of some recent personnel changes that saw the confirmation last week of Lael Brainard to the Federal Reserve Board and Stanley Fischer as Fed vice chair:

These two confirmations will help restore the balance and may encourage a downward drift in the dot plot, to the particular benefit of longer term bonds and also the value of risk assets.